Monthly Archives: April 2012

Seasoned investor Michael Dever recently released Jackass Investing – Don’t do it. Profit from it. I have the honor of reviewing the book. For the sake of time, I am providing a review of one of the Myths (chapters) presented in the book.

Risk is a major issue when it comes to investing. If you’ve ever consulted with an ‘investment professional’ you were most likely asked about your level of risk aversion. What does risk really mean though when we’re talking about investing? Obviously, you’d probably say, “The likelihood that I’m going to lose my investment money!” Right…Yet, how do you answer the question of how likely/unlikely you will be to lose your investment?

In a thorough, readable and example filled chapter, Mr. Dever illustrates that often times what depicted as ‘risk’ in the investment world is based on statistical assumptions. Often times these assumptions are built upon historical analysis that attempts to identify correlations that can be leveraged for gain. In the midst of this ‘rear-view-mirror’ investing method, an important factor is lost; what is the return driver behind the strategy and what could change to invalidate the assumptions made?

It’s a breath of fresh air to read Mr. Dever’s observations about the use of statistical analysis to define risk apart from fact based business sense. Within the realm of investing and outside of investing, the actual drivers that enable events, relationships and outcomes to occur are often not fully understood. The lack of understanding is not so much from a lack of ability or information, but a lack desire and/or misplaced confidence.

I’ve heard more than once in conversation the point made that “If you’re an excellent statistician you can probably make a lot of money investing.” Some truth does exist in that statement, but investing is not card counting. Yes, exploitable patterns may exist that are historically seen as having a high probability of reoccurring. The question that needs to be answered prior to buying into such relationship is “What’s the root cause?” Without understanding the investment and business-sense, the risk inherent within an investment/trading strategy cannot be properly understood.

I highly recommend Mr. Dever’s book, Jackass Investing – Don’t do it. Profit from it. New and seasoned investors will find many nuggets of knowledge to help ensure they don’t end up being a jackass with their investments.

My Take: The IMF predicts that an extra 3 years of living on average amongst the general population will create a 9% increase in pension plan liability. An immediate fix to this problem would take an infusion equivalent to 50% of developed economies GDP as of 2010. This ‘3 year’ is not so much hypotetical, since that’s what is being observed demographically. If the topic of unfunded pension liabliity was not already a dark enough problem, the situation appears to becoming even a more ominous.

I am of the opinion that in the mid-latter part of our current decade we will experience a good deal of pension reform. This reform will not be minor tweaks, but major changes. As a result, many older and younger people are going to be VERY unhappy about what they told. Changing ones expectations mid-game is not only bad because it undermines trust, but it also resets ones assumptions about the future. When a person operates under certain assumptions about what they will/will not do in the future and then has these assumptions changed, the consequences can be significant. Don’t think this process will be smooth either politically or economically.

Demographers for many years have assumed that the lengthening of lifespans would slow in developed countries. But with continual advances in medical technology, that has not happened as acutely as expected. In emerging economies, rising People worldwide are living three years longer than expected on average, pushing up the costs of aging by 50 percent, and governments and pension funds are ill prepared, the International Monetary Fund said…READ MORE.

My Take: The story (below) about Dow Chemical helps put into perspective the not so direct implications when we think of more plentiful and less costly natural gas supplies within the U.S. It’s not only energy companies changing their business thought process, but manufacturing and chemical companies, as well. Secondly, the article also reveals that a very large multinational chemical company believes that the over-supply of natural gas in the U.S. is not a short-term phenomena.

Current spot prices for natural gas contacts are around/under $2 per million BTUs. This trading range is as low as gas prices were in the late ’90s. This is a far cry from $14 per mBTUs that occurred around 2005. Natural gas prices have been trending downwards since 2008. If the market continues to demonstrate that supply will continue to overwhelm any shifts in demand, a greater number of manufactures, chemical producers and other energy intense industries will begin to adopt more natural gas energy sources in their business production.

FREEPORT, Texas—Dow Chemical Co. will build a multibillion-dollar plant to convert natural gas into the building blocks of plastic in this coastal city, becoming the latest chemical maker to capitalize on the abundant gas supplies that are helping spur a renaissance in U.S. manufacturing…READ MORE.

Why Liquid Natural Gas (LNG) is an attractive investment given the large differences in natural gas prices throughout the world compared to the U.S.

What IPO debuted in March that provides LNG transportation services throughout the world and what you should expect from the company when it anticipates paying dividends in the 4th quarter

One area of the data collection revolution that is likely to not feel the criticism of privacy advocates and how one company is positioned to provide real economic value to companies who would benefit from more effective and less costly monitoring services

An updated model portfolio performance table

Cars, reoccurring costs and considering what you forgo when you make a purchase – Opportunity cost matters

Electric cars, hybrids and high-mileage versions of some vehicles are more efficient but also more expensive than similar offerings from the same brand. Even given high gas prices, it may take years to earn back the additional cost…Related article.

My Take: Most people (maybe?) have already filed their tax returns, so this information (bel0w) might seem a little late, but it is not. I strongly believe that people do not realize that they have the ability to deduct up to half of your adjusted gross income (term defined below) through donations to charities (non-profits). This is huge in that the Federal government allows you to direct your otherwise taxed dollars to a cause of your choice. If you really care about a cause and know of a non-profit that is doing work in that area, you should seriously think about giving to the organization. It’s a win-win situation for you and them. You can give and lesson your tax burden, while you support the cause you care about.

I’m linking to a web page that provides a very good overview of the current rules and limitations that concern tax deductions and charitable donations. Once you are armed with this knowledge, then when you see a cause that you might want to support, you can make a more informed decision regarding your ability to contribute. Many people see non-profits asking for a donation as a losing proposition…at best it is seen as a way to get someone to stop bothering you. This isn’t true. If you have an actual interest in the non-profit or don’t like to see so much of your taxes go to the Federal government, then maybe you’re at the doorstep of a great opportunity.

Note: Adjusted Gross Income (AGI) is calculated as your gross income from taxable sources minus tax-expempt items like qualified medical expenses and retirment plan contributions. You can find your AGI on page 1 of your Federal tax return. You might also here AGI referred to as net income.